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The Difference Between Private and Public Debts - Case Study Example

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The paper "The Difference Between Private and Public Debts" states that if forgiving odious debt or putting a debt cap was instituted, the Third World might be able to pull itself from poverty and into industrialization. Public debt needs different political and economic treatment and enforcement…
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The Difference Between Private and Public Debts
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Download file to see previous pages Consider the way that the British defaulted on war debts to the Americans (Mead, 2002). Most of the industrialized nations have defaulted on debt. Spain defaulted thirteen times over four centuries! Indeed, “French finance minister Abbe Terray... even opined that governments should default at least once every hundred years”... (Reinhart and Rogoff, 2009, p. 87). This indicates two things about public debt. First of all: Default on public debt is nearly omnipresent. This is because the debtors in question are themselves likely to be permanent institutions, based on the logic of the European nation-state system, and are borrowing from other states, who are also permanent institutions. Yet the defaulting rate on private loans is nowhere near 100%.

Second, enforcement of public debt is highly politicized and uneven. Britains war debts were excused; Germanys weren't (Mead, 2002). Most private debt is treated relatively evenly: One is loaned money and one has to pay it back, no matter who one is.

We can also see from this that this uneven enforcement can give countries an incentive to default that is not present in the domestic economy. It is hard to enforce across country lines. And, of course, access to enforcement varies. If the US defaulted on a loan to China, they could use their military power to prevent enforcement. If Nigeria defaulted on a loan to the United States, the matter would be entirely different.

Another difference is that, while private debt is based on an individual family's economic situations or the micro-economy of a region, public debt is often based on entire market institutions and trends ( Reinhart and Rogoff, 2009, p. 87-89). Capital inflows or growth often precede defaults, due to large amounts of debt being taken on due to the belief that “this time will be different”. Individual families or companies do not tend to behave this way. Countries do. ...Download file to see next pagesRead More
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